Royal Mail move ‘shoddy accounting’ by UK government

The government’s decision to nationalise the assets of the Royal Mail pension fund while taking on all future liabilities is another example of accounting sleight-of-hand by an administration that really should know better. The pension fund assets will be used immediately to reduce the government’s debt while the liabilities – made up of future pensions to workers – will no longer be funded and will have to be met by future generations of taxpayers.

These liabilities will, of course, be hidden from the government’s accounts. Although, ostensibly, the assets will be used to pay down the debt, future Chancellors of the Exchequer will just see this action as creating more headroom for additional future borrowing. Indeed, in many senses, the action taken by the United Kingdom is similar to the widely-criticised actions taken by the Hungarian and Argentinean governments, when they nationalised private pension assets but gave members of those private schemes pay-as-you-go taxpayer-funded rights instead.

The numbers are quite large. According to the government’s own figures, the liabilities are between £4bn and £10bn greater than the assets – which stand at £28bn. However, if valued properly, the liabilities would probably be over £20bn more than the assets. Government accounts will show a reduction in the government’s national debt of £28bn whereas, in reality, the national debt – including the implicit parts of the national debt – will be increasing by over £20bn.

The £28bn that will be used to repay the debt represents about 3 per cent of the existing national debt and will represent around 30 per cent of the government’s borrowing requirement in the year the transaction happens. Although the government claims that it will not be spending the £28bn raised from taking over the assets, the signs that future governments will not feel so constrained are already apparent. There are calls from backbenchers and leading industry figures to spend the money on infrastructure projects.

The government would not allow a private sector company to get away with such shoddy – indeed, underhand – accounting practices. It should not be using such practices itself. The administration has brushed away criticism by saying that accounting for government borrowing is a matter for the Office for National Statistics. This may be so, but the government itself sets the parameters within which the ONS works. It could require the ONS to account for government debt – implicit and explicit – properly.

As things stand – the increase in future pensions obligations represented by this debt will appear in some, barely noticed, figures that are published by the ONS. But, when the government faces the electorate in three years, it will claim that the national debt has been reduced by this £28bn. Whereas, in fact, the national debt has been increased as a result of this transaction. It should be remembered too that this is a government that promised to deal with the problem of public sector pensions. Not unreasonably – though mistakenly – the government rejected any element of funding for such schemes. However, to create an unfunded scheme from a scheme that has hitherto been funded and add further to already pre-existing government guarantees is deeply short-sighted.

The article can also be read here.

Philip Booth is Senior Academic Fellow at the Institute of Economic Affairs. He is also Director of the Vinson Centre and Professor of Economics at the University of Buckingham and Professor of Finance, Public Policy and Ethics at St. Mary’s University, Twickenham. He also holds the position of (interim) Director of Catholic Mission at St. Mary’s having previously been Director of Research and Public Engagement and Dean of the Faculty of Education, Humanities and Social Sciences. From 2002-2016, Philip was Academic and Research Director (previously, Editorial and Programme Director) at the IEA. From 2002-2015 he was Professor of Insurance and Risk Management at Cass Business School. He is a Senior Research Fellow in the Centre for Federal Studies at the University of Kent and Adjunct Professor in the School of Law, University of Notre Dame, Australia. Previously, Philip Booth worked for the Bank of England as an adviser on financial stability issues and he was also Associate Dean of Cass Business School and held various other academic positions at City University. He has written widely, including a number of books, on investment, finance, social insurance and pensions as well as on the relationship between Catholic social teaching and economics. He is Deputy Editor of Economic Affairs. Philip is a Fellow of the Royal Statistical Society, a Fellow of the Institute of Actuaries and an honorary member of the Society of Actuaries of Poland. He has previously worked in the investment department of Axa Equity and Law and was been involved in a number of projects to help develop actuarial professions and actuarial, finance and investment professional teaching programmes in Central and Eastern Europe. Philip has a BA in Economics from the University of Durham and a PhD from City University.

1 thought on “Royal Mail move ‘shoddy accounting’ by UK government”

  1. Posted 20/03/2012 at 14:39 | Permalink

    It is hardly news that governments are dishonest; but I wonder whether one or more of the Select Committees in Parliament — whose job surely is to hold governments to account — could take an interest in this particular disreputable episode. What about the Public Accounts Committee (chairman: Margaret Hodge) or the Treasury Select Committee (chairman: Andrew Tyrie)? If all else fails, maybe even the official Opposition could begin the long journey to ‘restoring’ its credibility by criticising the proposed accounting treatment.

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